NASFAA Expresses Concern With ED's Proposed Borrower Defense Rules

In just 30 days since the Department of Education (ED) published a proposed rule for borrower defense to repayment, more than 37,000 public comments have been submitted, including one from NASFAA. Many of the comments submitted are in either strong support or opposition to the rule, urging ED to dismiss or adopt the rule as proposed. In its comments to ED, NASFAA expressed concern with several aspects of the proposed rule, such as plans to largely only give partial relief to wronged borrowers, precluding borrowers from filing closed school discharges if a teach-out option is offered, and more.

ED published its Notice of Proposed Rulemaking (NPRM) for the borrower defense regulations at the end of July, with many consumer advocates and Democratic lawmakers quickly denouncing the rule, saying it would make it more difficult for harmed borrowers to obtain relief, and easier for bad actors to take advantage of certain students.

Overall, NASFAA said in the submitted comments that the proposed rule may set too high of a bar for borrowers to achieve redress.

"We agree that the 2016 borrower defenses final rule needed improvement, including a better balance between relief for borrowers and due process for schools. This balance is not easy to achieve," the comments said. "The Department's intention to provide borrowers and schools with equal opportunity to provide evidence and arguments, and to review and respond to evidence, is essential to a fair process. However, we are concerned that the pendulum has shifted too far once again, now making it too difficult for borrowers to obtain relief."

Philosophically, NASFAA challenged ED's claim in the proposed rule that college students "are adults who can be reasonably expected to make informed decisions if they have access to relevant and reliable data about program outcomes."

"While students do have responsibility for making informed choices, they do not become sophisticated consumers or financial experts upon turning 18 or graduating high school; the least experienced and least sophisticated students are those most likely to be preyed upon by bad actors," NASFAA President Justin Draeger wrote in the comments. "We should not abandon students entirely to the principle of caveat emptor."

In the proposed rule, ED also left a specific question for the public to address: whether it should only allow "defensive" claims — meaning a borrower must be in default and in collections — or to also allow "affirmative" claims that would include borrowers who are not in default on their loans.

In the proposed rule, ED said it is "concerned that a process that allows for borrowers to submit affirmative claims, where there are minimal consequences for submitting an unjustified claim, could potentially create improper incentives for borrowers with unsubstantiated allegations against schools to seek loan discharges." Further in the document, ED said that if it decides to allow affirmative actions, a higher standard of evidence may be required. For now, ED is proposing maintaining the standard of evidence from the Obama-era regulations: preponderance of the evidence.

In the comments submitted to ED, NASFAA said that both affirmative and defensive claims should be allowed, and that the "same processes and standards of preponderance of evidence" should be applied to both types of claims.

"It is flatly immoral to impose conditions that require a borrower to default before he or she can assert a borrower defense. After decades of counseling students to avoid default, telling them now to default in order to comply with a bureaucratic process is unworkable," NASFAA's comments said. "It is equally unjustifiable to expect a higher standard of proof for affirmative claims. If a borrower fails to meet a higher standard for an affirmative claim, and is then unable to repay, would he still have a right to make a defensive claim under a lower bar of proof? That seems counterproductive and unnecessarily burdensome."

NASFAA also generally supported the idea of a federal standard "and limiting borrower defenses to cases of misrepresentation relating to educational services," but felt that requiring borrowers to prove an institution's intent "is an impossibly high expectation" to place on borrowers and should be ED's responsibility to do so.

Generally, NASFAA argued that institutional intent should not impact a borrower's ability to obtain relief if they were harmed: "With the complexity of federal requirements, the intensity of modern communications, and the drive towards maximum transparency, it is not difficult to overlook or unintentionally disseminate erroneous information. However, if the school's failure to prevent misrepresentation harms a borrower who relied on incorrect information that amounts to a misrepresentation, the borrower should have recourse regardless of the school's intent to deceive or mislead," the comments said.

However, NASFAA wrote, the institution's intent should be taken into consideration for purposes of penalties and limitation, suspension, and termination (LS&T) determinations.

NASFAA also challenged ED's plan to generally only give borrowers partial relief "based on the degree of harm suffered by the borrower," saying that if a borrower has been harmed, or clearly will suffer harm, as a result of the institutional misrepresentation, then full relief should be granted. Partial relief should be granted only in "very limited cases where the value of harm done is directly related to the misrepresentation itself, and is clear and straightforward (for example, the amount of institutional charges was grossly misrepresented)," NASFAA wrote in the comments. Additionally, NASFAA said that if a borrower does receive only partial relief, then any other relief received from a non-federal process should be applied to the borrower's loan balance before reducing the federal relief.

NASFAA also encouraged ED to not prevent borrowers from filing for a closed school discharge if a teach-out option was offered, but rather allow for an appeals process for borrowers to show why they were unable to take advantage of the teach-out opportunity.

"For example, the teach‐out might involve travel or timing constraints that make the teach‐out impractical or unreasonable," the comments said. "Students choose programs not just for their academic content, but for compatibility with job responsibilities, family commitments, personal limitations or disabilities, and other such considerations. When a school closes, the student's educational opportunities may become far more restricted regardless of whether a teach‐out opportunity was available."

The proposed rule also reverses the 2016 regulations' ban on pre-dispute arbitration clauses and class action waivers. NASFAA said in its comments that ED should not allow such arbitration to prevent a borrower from filing a defense to repayment claim, "nor should it allow arbitration to run out the clock on a borrower's time period for filing a discharge claim." NASFAA added that if ED does not ban pre-dispute arbitration agreements that it should "at least definitively state that no arbitration agreement may abrogate a borrower's right to file a federal defense to repayment claim, and that the borrower may initiate such a claim at any time regardless of the arbitration process."

With respect to class action waivers, NASFAA said the preamble to the rule does not explain why such waivers should be allowed, and does not provide language stating a waiver could not prohibit a borrower from filing a defense to repayment claim, or affect their ability to use a class action lawsuit as evidence to support a claim.

"At a minimum, any disclosures required of a school regarding arbitration or class action waivers should specify that they do not preclude a student from seeking relief through the federal borrower defenses to repayment provisions," the comments said. "The Department should also consider barring class action waivers if the school has no independent pre‐dispute arbitration process, if it declines to ban them outright."

Overall, NASFAA said that the rule as written may create an imbalance between the interests of students and institutions.

"Our comments are made with the goal of creating an appropriate balance between relief for borrowers, and due process and accountability for schools," the comments said. "To that end, we are concerned that the provisions of the proposed rule, in combination with each other, create an imbalance, with too many barriers for borrower relief."

ED will publish a final rule by Nov. 1, 2018, with the new rule set to take effect July 1, 2019.

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